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Privatizing the U.S. Postal Service

The U.S. Postal Service (USPS) is a major business enterprise
operated by the federal government. Revenues from the sale of USPS
products are supposed to cover the company’s costs. But with the
rise of electronic communications, mail volume has plunged, and the
600,000-worker USPS has been losing billions of dollars a year.

The USPS has a legal monopoly over various types of mail. Thus
entrepreneurs are prevented from competing in the postal industry
to improve quality and reduce costs for the benefit of
consumers.

Other countries facing falling mail volume have privatized their
systems and opened them to competition. America should follow suit
and liberalize its postal industry so that it can adjust to changes
in the modern Internet-based economy.

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Congress confers on the USPS monopolies on the delivery of
first-class mail (letters under 13 ounces) and standard mail (bulk
advertising items). The agency also has a legal monopoly on access
to mailboxes, which is a unique protection among postal systems in
the world.1

It has been able to borrow $15 billion from the U.S. Treasury
at subsidized interest rates.

It is exempt from state and local sales, income, and property
taxes and fees.

It pays federal corporate income taxes, but those taxes are
circulated back to the USPS.

It is not bound by local zoning ordinances, is immune from a
range of civil actions, and has the power of eminent domain.

It has government regulatory power, which it has used to impede
competitors.

USPS Failures

Despite those advantages, the USPS has lost more than $50
billion since 2007, and will likely continue losing money unless
there are major reforms.3 One problem is that Congress stymies
USPS efforts to improve efficiency. It impedes USPS plans to close
unneeded post office locations, even though the bottom 4,500 rural
locations average just 4.4 customer visits a day.4 It blocks
the consolidation of mail-processing centers, and it blocks USPS
plans to end Saturday delivery. Private businesses make such
adjustments to their operations all the time as demands for their
products fluctuate.

USPS’s costly union workforce is another problem. USPS worker
compensation is substantially higher, on average, than for
comparable private-sector workers.5 Collective bargaining
agreements-which cover more than four-fifths of the USPS
workforce-make it more difficult for management to make cost-saving
changes, such as increasing part-time work. And, in some cases,
unions have resisted the automation of postal functions.

The postal system’s financial challenges stem from first-class
mail volume falling from a peak of 104 billion pieces in 2001 to 62
billion pieces in 2015, a decline of 40 percent.6 The decline
is driven by the rise of email, Facebook, Evite, and Internet bill
paying; the decline of printed magazines; and the rise of online
advertising as an alternative to bulk print advertising.

The USPS’s financial challenges have been compounded by a
requirement passed in 2006 to pay down the company’s large unfunded
liabilities for retiree health care.7 USPS defenders
complain that private companies are not required to pre-pay retiree
health costs. But the vast majority of private firms do not even
offer retiree health coverage. Also, since traditional mail faces a
long-term decline, it is better to tackle these costs now than to
leave them to taxpayers down the road under a possible federal
bailout of USPS.

Postal Reforms Abroad

Other nations with money-losing mail systems have either
privatized them, opened them to competition, or done both. Private
companies have more flexibility to deal with today’s challenges.
And with the rise of the Internet, the claim that mail is a natural
monopoly needing special protection is weaker than ever.

The European Union has recognized these realities and has
pressed its member nations to deregulate their systems. Most EU
countries now have a more entrepreneurial postal industry than we
do. The U.S. ranks near the bottom of the Consumer Postal Council’s
26-country “Index of Postal Freedom.”8

Here is a sampling of postal reforms abroad:

Sweden in 1993 became the first major European country to
repeal its postal monopoly. Sweden Post (now PostNord) was put into
a corporate structure, but it is still owned by the
government.

The Netherlands partly privatized its national postal company
in 1994. Majority control shifted to the private sector in 1995,
and the company later became part of TNT, a global delivery
company. Netherlands opened postal markets to competition in
2009.

New Zealand cut costs at New Zealand Post in the 1980s, and put
the company into corporate form. The country repealed its postal
monopoly in a series of laws during the 1980s and 1990s.

Germany partly privatized Deutsche Post in a stock offering in
2000. Today, 79 percent of company shares are publicly
traded.9 Germany opened its postal markets to
competition in 2008.

Britain opened postal markets to competition in 2006, and
privatized the Royal Mail in share offerings in 2013 and
2015.10

In many countries, dominant national carriers now have some
competitors, often focused on niches such as business mail or bulk
mail. Some privatized companies, such as Deutsche Post, have
expanded internationally. Progress toward full competition has been
a slow but steady process.

Experience has shown that both privatization and open
competition create efficiency gains. In New Zealand and Sweden,
government postal firms slashed their workforces about one third
when they were restructured and opened to competition.11 Similar job cuts were prompted when
Germany and the Netherlands privatized their systems.

Reforming USPS

Congress should privatize the USPS, repeal its legal monopolies,
and give the company the flexibility it needs to innovate and
reduce costs. Those reforms would give entrepreneurs a chance to
improve America’s postal services. In 1979, when the USPS- under
political pressure-lifted its monopoly over “extremely urgent”
mail, we saw the growth of innovative private delivery firms such
as Fed Ex.

Instead of privatization, some USPS supporters want the company
to expand into banking, payday loans, grocery delivery, and other
activities. But rather than solving any problems, such expansions
would create more distortions. The USPS would have to find
activities where it could earn above-normal profits to funnel
excess cash back to support the mail system. But it is unlikely
that a government agency-if not subsidized-could out-compete
private firms in other industries. Past USPS forays into non-mail
areas, such as electronic bill paying, ended in failure.12 And if the USPS used its government
advantages to undercut private firms, it would be both
distortionary and unfair.

In a 2015 study, economist Robert Shapiro found that the USPS
raises prices on its monopoly products and uses those revenues to
subsidize express mail and package delivery.13 This works
because consumers are less price sensitive for the monopoly
products than for the competitive products. Shapiro estimates that
these cross-subsidies are $3 billion or more a year.

For Fed Ex, UPS, and other private firms, however, this is
unfair because-unlike USPS-they have to pay taxes, borrow at market
rates, and follow all the normal business laws and regulations.
Shapiro thinks that “without its subsidies, [the USPS] probably
could not compete at all” against these more nimble private
firms.14

These problems are difficult to solve under the current postal
structure because the USPS hides the cross-subsidies in its books
by attributing a large share of costs to overhead.15 So a
benefit of privatization and open competition would be to increase
transparency in postal finances and pricing, and to end the
cross-subsidies.

Policy experts are coming around to the need for major reforms.
Economist Robert Atkinson proposed that the USPS focus on
delivering the “final mile” to homes, while opening collection,
transportation, and the processing of mail to competition.16 Elaine Kamarck of the Brookings
Institution has also proposed partial privatization.17 She would split the USPS into a
government piece that fulfills the “universal service mandate” for
delivering mail to every address, and a privatized piece that would
compete with other firms for activities such as collecting
mail.

The Atkinson and Kamarck proposals move in the right direction,
but foreign reforms show that full privatization is both feasible
and consistent with universal service. In Germany, Britain, and the
Netherlands, the dominant firms continue to provide universal
service. Postal companies have a strong incentive to provide
universal service because, as a network industry, the value to
customers of the service increases the more addresses that are
served.

USPS supporters fear that rural areas would be left out unless
the government required universal service. But economist Richard
Geddes argues that is probably not the case.18 Rural post
routes can be as cost-effective to serve as urban routes because
rural letter carriers stay in their trucks and use roadside boxes,
whereas urban letter carriers often walk their routes.

Looking at nations that have privatized or opened their postal
systems to competition, economists Robert Carbaugh and Thomas
Tenerelli found that rather than the price increases and service
reductions that some people fear, “liberalizing countries have
shown the ability to offer affordable, reliable, universal, and
increasingly efficient postal-delivery services.”19

U.S. policymakers should be more flexible with the idea of
“universal service.” For example, if delivery was reduced from six
days a week to every second day, it would allow USPS to slash its
massive fleet of 211,000 vehicles, which would reduce both costs
and energy consumption. Other countries interpret universal service
more narrowly than we do-some countries have cluster boxes for
communities, some exclude bulk mail from universal service
requirements, and some allow more flexibility in pricing.20

All that said, a universal service obligation for paper mail is
not needed in the modern economy. Electronic communications bind
the country together without it. Household-to-household personal
letters have plunged to just 3 percent of total mail volume
today.21 Advertising represents 60 percent of
the entire household mail volume. Bills and other business
statements are the second largest type of mail, but these are being
replaced by electronic payments, which now account for 63 percent
of all bill payments.22

Essentially then, Congress imposes a rigid monopoly on the
nation so that we can continue to receive mainly “junk mail” in our
mailboxes six days a week. But there are 205 billion emails blasted
around the planet every day, so it makes little sense to retain
special protections for the government’s old-fashioned paper
delivery system.23

Conclusions

In a Washington Post op-ed, former U.S. Postmaster
General William Henderson said, “What the Postal Service needs now
is nothing short of privatization.”24 He was right.
Congress should wake up to changes in technology and to postal
reforms around the world. Other countries have shown that postal
liberalization works, and it would work in America as well.

1 R.
Richard Geddes, “Reform of the U.S. Postal Service,” Journal of
Economic Perspectives 19, no. 3 (Summer 2005): 219.2 Robert
J. Shapiro, “The Basis and Extent of the Monopoly Rights and
Subsidies Claimed by the United States Postal Service,” Sonecon,
March 2015.3 Michael
Schuyler, “Troubles at the Postal Service,” Tax Foundation,
September 2015.4 U.S.
Postal Service, “Our Plan to Preserve Rural Post Offices,” May 9,
2012.5 Robert
J. Shapiro, “The Basis and Extent of the Monopoly Rights and
Subsidies Claimed by the United States Postal Service,” Sonecon,
March 2015, p. 14.6 U.S.
Postal Service, “First-Class Mail Volume Since 1926,” February
2016.7 The
requirement was passed in the Postal Accountability and Enhancement
Act of 2006.8 See
Consumer Postal Union, “Index of Postal Freedom,” 2012,
www.postalconsumers.org.9 The
other 21 percent is held by a government-owned bank.10 The
privatized Royal Mail delivers letters and packages. The government
retained the “Post Office,” which operates a retail chain providing
postal and other services.11
Vincent Geloso and Youri Chassin, “Canada Post: Opening Up to
Competition,” Montreal Economic Institute, May 2011. And see
Geddes.12
Robert D. Atkinson, “Postal Reform for the Digital Age,”
Information Technology and Innovation Foundation, June 2013, p.
13.13
Robert J. Shapiro, “How the U.S. Postal Service Uses Its Monopoly
Revenues and Special Privileges to Subsidize Its Competitive
Operations,” Sonecon, October 2015.14
Ibid., p. 4.15
Ibid. And see Schuyler.16
Atkinson.17
Elaine Kamarck, “Delaying the Inevitable: Political Stalemate and
the U.S. Postal Service,” Brookings Institution, September 18,
2015.18
Geddes, p. 224.19
Robert Carbaugh and Thomas Tenerelli, “Restructuring the U.S.
Postal Service,” Cato Journal 31, no. 1 (Winter 2011), p.
140.20 Don
Soifer, “Universal Postal Services in Major Economies,” Consumer
Postal Council, June 2015.21 U.S.
Postal Service, “The Household Diary Study 2012,” May 2013, Tables
E.2. and 3.1. And see discussion in James L. Gattuso, “Can the
Postal Service Have a Future,” Heritage Foundation, October 10,
2013.22
Janet Granger, “How Americans Use the Postal Service: By the
Numbers,” Pitney Bowes, August 26, 2015.23
Email statistic from The Radicati Group, “Email Statistics Report,
2015-2019,” press release, March 2, 2015,
www.radicati.com/?p=12964.24
William J. Henderson, “End of the Route: I Ran the Postal
Service-It Should be Privatized,” Washington Post,
September 2, 2001.